What does tech think of a potential M&A moratorium? 'A fire hose to blow out a candle'

Warning of "vultures" waiting to snap up smaller competitors who've been battered by the economic collapse, Sen. Elizabeth Warren and Rep. Alexandria Ocasio-Cortez are proposing a coronavirus-era variant on efforts to limit what they see as the growing monopoly power of the biggest corporations: a temporary ban on some mergers and acquisitions. The tech world's response? The lawmakers are missing the mark and might do much more harm than good.

"As applied to the tech industry, the concerns that are being raised are not applicable," said M&A lawyer Alessandra Simons. "It's like trying to solve a problem by using a fire hose to blow out a candle."

A partner at Goodwin Procter, Simons is helping videoconferencing service BlueJeans be acquired by Verizon, a move the Federal Trade Commission is allowing to go through at an accelerated pace, according to a notice posted Monday. She asserted that, for the most part, big tech companies don't seek to muscle out competitors, but rather acquire small businesses to "expand their product offering," which is not necessarily in the wheelhouse of antitrust regulators.

Warren and Ocasio-Cortez's proposal, regardless of its success, draws on the tension over tech giants whose influence only seems to be expanding during the pandemic, warning that "big tech has moved to snatch up struggling startups." It echoes a similar call this week from House Judiciary antitrust subcommittee chair David Cicilline, a Democrat from Rhode Island. "As millions of businesses struggle to stay afloat, private equity firms and dominant corporations are positioned to swoop in for a buying spree," Cicilline said.

Warren, Ocasio-Cortez and Cicilline all say they want to include a merger moratorium in an upcoming COVID-19 economic stimulus package, known as "Phase 4" in D.C. parlance. But they're facing resistance from Republicans and representatives of the business world, who warn that an all-out pause on M&A could stall an already suffering economy.

Noah Phillips, a Republican FTC commissioner, said in a phone interview Tuesday that the FTC, one of the two regulators tasked with overseeing antitrust law, has found that mergers and acquisitions are down significantly amid the pandemic as stock values plummet and businesses cope with having less cash on hand.

Phillips said it's "plausible" there will be a wave of tech acquisitions down the line. (In a recent survey, only 13% of tech, media and telecom CFOs said COVID-19 was decreasing their appetite for takeovers, compared to 25% across industries.) "But it's the opposite of what we're seeing right now," said Phillips, who has spent much of the week criticizing the Democratic merger moratorium idea.

Phillips confirmed that the FTC is continuing to forge ahead in its review of a decade of acquisitions by the largest tech companies and its antitrust probe of Facebook. "I think we ought to be driven in policymaking by the facts on the ground," Phillips said.

Warren and Ocasio-Cortez's proposal, which they plan to write into legislation, would ban "risky" mergers and acquisitions that involve companies with more than $100 million in revenue or financial institutions with more than $100 million in market capitalization. The prohibition would extend to private equity companies, hedge funds or companies that are majority-owned by a private equity firm or hedge fund, as well as to all transactions that must otherwise be reported to the FTC.

The lawmakers also want the FTC to establish a legal presumption against M&As that pose a "risk to the government's ability to respond to a national emergency."

The sweeping proposal is unlikely to gain serious traction in Congress. Several GOP members of the House Judiciary Committee were frustrated when Cicilline announced his proposal last week without giving them a heads-up, a GOP aide close to the committee's thinking told Protocol. Cicilline has not yet released the text of his proposal, which will likely take the form of a letter to House leadership, but he said he hopes to prevent dominant corporations from going on a "buying spree" while still leaving room for "merger activity that is necessary to ensuring that distressed firms have a fresh start."

"We are deeply skeptical of what Cicilline's proposing here," the GOP source said, calling it an "antitrust power grab in the middle of a crisis."

Nonetheless, that Warren, Ocasio-Cortez and Cicilline are coalescing around the idea provides a measure of progressive energy — which has effectively shaped the policy debate around tech for the past two years. "These companies should be using their cash reserves to help their employees, not to acquire more power," Ocasio-Cortez said in a statement. "If we don't stop predatory M&As now, the actions of big corporations will have decades-long economic consequences — for all of us."

Netchoice, a tech trade group that counts Facebook, Google and Twitter among its members, has started to lobby against the moratorium proposals. Carl Szabo, Netchoice's vice president and general counsel, told Protocol that for many startups, which are notoriously unprofitable and experiencing mass layoffs due to COVID-19, mergers and acquisitions are a matter of survival.

Doug Cogen, a partner and co-chair of the M&A team at Fenwick & West, said many small companies rely on larger companies to "scale" their products. "A blanket moratorium is much too blunt an instrument at this critical time," Cogen said.

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Several smaller-scale congressional proposals emerged last month that would allow the FTC and Department of Justice to take more time reviewing emerging deals in light of the logistical difficulties posed by COVID-19. But none of those narrower proposals appeared in the final stimulus bill, noted Jacqueline Grise, the chair of law firm Cooley's antitrust and competition practice group, making it less likely that a broader ban could make it into the next legislative package.

"We have heard from a lot of clients that are concerned," said Grise, including "private equity, bankers and everybody wanting to get a read on whether this is really likely to happen or not."

"We say that we understand there's a reason to be potentially concerned, but at the end of the day … those proposals in the past didn't get passed either and those were less aggressive proposals," Grise said. "We tell clients we're watching it very closely, but nothing is expected to happen soon."